A Plus

Enacting a statutory business judgment rule for Hong Kong

April 2018


Chee Keong Low, Associate Professor in Corporate Law at CUHK Business School, on how having a statutory business judgment rule would help protect directors from unnecessary criticism in the workplace



Directors are often regarded as front-line gatekeepers for good corporate governance, and are subject to ever-increasing scrutiny. Much of the reforms are centred upon a regulatory philosophy of keeping them honest and “on the straight and narrow,” often by compelling them to “do X”, “do Y” and/or “do Z.” This approach presumes that regulators have the inherent ability to subject business decisions to systematic analysis. It falls short of recognizing that such decisions often involve intangible and intuitive insights, which is especially true now given the increasing complexity and sophistication of commercial activities.

A number of policy questions arise from the “hindsight is 20/20” approach. For example, why aren’t directors protected from making decisions that are made without any conflicts of interest and with full knowledge and appreciation of material facts, even if the company is to subsequently suffer a loss? Should the law not be more accommodating, by allowing directors to get back to the basics of business within a capitalist framework, by promoting entrepreneurism through the facilitation of legitimate business decisions and risk-taking? In short, is it not time to consider the enactment of a statutory business judgment rule to rebalance the scales, so as to reward directors who are prudent, independent, vigilant, and capable of making reasonable and informed decisions?

It would be wise to recognize  a statutory business judgment rule for what it is, namely, a statutory compromise between two competing policy objectives. On one hand, it seeks to recognize the director’s authority to make decisions without being second- guessed, while on the other, it seeks to ensure that the director remains accountable. One should be careful to avoid adopting an over-reliance on the subjective state of mind of directors, in relation to both the processes they use to inform themselves, and as to whether a decision made is in the best interests of the corporation. An objective element  is needed for the business judgment rule, to ensure that the standard of care required of directors does not become overly protected and, as a consequence, the objective of accountability is compromised.


“Why aren’t directors protected from making decisions that are made without any conflicts of interest... even if the company is to subsequently suffer a loss?”

We must recognize that companies do not operate within a vacuum of absolute certainty and that the assumption of reasonable risks should be acceptable, provided that this is according to the expected returns or benefits that may accrue. If issues do in fact arise and directors are sued, it should be incumbent upon them to present evidence to the standards required to support their assertion that they had not breached their duty to the company. If this condition is fulfilled, it would not be right for the regulators and/or the courts to involve themselves to second-guess such judgment calls with the benefit of hindsight, using a largely paper-based analysis and  viewing the events from a timeframe perspective separate from the rate at which the events occurred.

The statutory business judgment rule is not a carte blanche for directors. As it requires directors to make conscious decisions – by actively considering matters and analysing available evidence – the discharge of “oversight” responsibilities, such as monitoring the affairs and policies of the company as well as the maintaining of familiarity with its financial position, logically cannot be “business judgment."

It must be highlighted that the mere fact that the issue involves compliance will not automatically, just on its own, mean that it is not a business decision. It is entirely possible that directors may actively turn their minds to matters of compliance – such as appeals on rulings by relevant authorities including the tax department or the securities regulator – to make these bona fide business decisions.

An ideal board of directors will always be careful, loyal and act in good faith. However, directors as ordinary human beings, are not infallible. With increasingly onerous demands imposed upon directors of companies – who are often viewed as the primary gatekeepers – there is a need to “balance the scales” so the office remains a sufficiently desirable place to attract and retain the next generation of corporate leaders, who have the correct vision and entrepreneurial acumen needed to keep Hong Kong as an international business centre of choice.